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Yoga wear company Lululemon says difficult year ahead as quarterly profits drop

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Lululemon Athletica Inc. expects a tough year ahead as the yoga-wear retailer tries to recover from various fumbles that have hurt its reputation with once loyal customers.

The company reined in expectations Thursday for its 2014 financial year and launched a share buyback program after a significant drop in the value of its stock over the past year.

Shares dropped nearly 15 per cent in morning trading after Lululemon (Nasdaq:LULU) posted a lower first-quarter profit compared with a year ago and cut its guidance for the year.

Chief executive Laurent Potdevin told investors on a conference call to discuss the company's financial results that while much of the decline was expected, there have been some surprises.

"We knew heading into 2014 that driving sales in the first half of the year would be impacted by a sub-optimal product assortment combined with soft traffic trends," he said.

"Second quarter sales have started off behind plans and (comparable figures from last year) are more impacted than we originally anticipated."

Lululemon reported Thursday a first-quarter profit of $18.98 million, or 13 cents per share, less than half of the $47.28-million profit, or 32 cents, reported a year earlier.

Excluding a one-time cost, diluted earnings per share were 34 cents in the first quarter, beating analysts' expectations of 32 cents.

Revenue increased 11 per cent to $384.6 million from $345.8 million.

Potdevin was hired late last year in the aftermath of problems related to a style of yoga pants that had fabric which was criticized as being too sheer.

That was followed by a public relations gaffe, when company founder Chip Wilson said in a TV interview in early November that, "some women's bodies just actually don't work" for Lululemon's tight-fitting pants. He issued a video apology later on Lululemon's YouTube video channel.

In response to the company's woes, Lululemon has reduced its financial outlook for the rest of 2014.

For the full 2014 financial year, the company expects diluted earnings per share to be in the range of $1.50 to $1.55, or $1.71 to $1.76 adjusted for a one-time tax adjustment related to the share buyback. That's a decrease from the previous expectations of $1.80 to $1.90 earnings per share. Net revenue to be in the range of $1.77 billion to $1.80 billion.

For the second quarter, Lululemon expects net revenue to be in the range of $375 million to $380 million and diluted earnings per share of 28 cents to 30 cents.

Potdevin described 2014 as "very much a transitional year" for Lululemon, as it works to shift the attention back to its products and the deeply ingrained yoga culture that has defined the company.

He told analysts that executives have a plan that will launch new products in stores, establish a better communication strategy that will "create long-term guest loyalty, bring guests back and attract new ones," and open more international stores.

Lululemon aims to open stores in eight countries by the end of this year in an effort to build its presence in Europe and Asia. A second location will open in London by the end of its financial year, while its first store in Hong Kong is targeted for the first quarter of 2015.

The company also announced that its board of directors approved a stock buyback program of up to US$450 million of its common shares.

The shares have been steadily sinking over the past year and are down more than 40 per cent from their 52-week high of US$77.75 on the Nasdaq in early October. The stock was down $6.63 to $37.90 on the Nasdaq near midday.

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